Retirement income must work for all

The federal government has issued a challenge to Australia’s superannuation industry to develop retirement benefit strategies that address the diverse needs of members ill-equipped to judge complex risk trade-offs on their own.

OPINION | In late 2017, Minister for Revenue and Financial Services Kelly O’Dwyer used a keynote address to a private industry forum to draw attention to the shortcomings of the retirement phase of the superannuation system.

O’Dwyer said funds should help their members by designing income solutions that meet their needs in retirement, and by cutting the complexity of the decisions members have to make about retirement products.

The Committee for Sustainable Retirement Incomes (CSRI) strongly agrees on the “absolute need to have a retirement income framework”, as the minister highlighted.

Going forward, a fund’s success will be judged on its ability to help members manage the heightened financial risks members face in retirement, when they no longer have the security of employment income.

These risks go well beyond investment risk. They include the possibility of facing negative returns when the member has little opportunity to recover losses (sequencing risk), the chance of outliving savings, and the major and often unexpected health and aged-care expenses of retirement (longevity risk).

The minister’s speech provided feedback on almost 12 months of consultation by Treasury on a regulatory framework for comprehensive income products for retirement (CIPRs), a key recommendation of the David Murray-led Financial System Inquiry.

Opinions vary on details

O’Dwyer said the Treasury consultation process had shown broad agreement on the importance of CIPRs, and on the idea that funds should offer multiple products designed for the needs of different member segments. There was, however, a range of views about specific design and implementation issues, including who
should and should not be offered a CIPR and measures to influence uptake by trustees and members.

The government has already acted to support more innovative solutions by removing tax barriers to new income stream products from July 1, 2017.

O’Dwyer also stated that she is working with Social Services Minister Christian Porter to determine the social security treatment of products such as deferred annuities that will form components of CIPRs. This is a critical first step. Without clarity about the means-testing of new income stream products, uptake of CIPRs will be severely constrained.

O’Dwyer foreshadowed further government consultation with the industry before finalisation of the regulatory framework for CIPRs, which Treasury has suggested be rebadged as MyRetirement products.

A range of strategies

Managing risks in retirement involves complicated trade-offs that are highly specific to each member’s particular circumstances and preferences. As has been shown in the numerous inquiries to date, most savers are ill-equipped to make decisions about accessing their retirement income or protecting themselves from these risks.
Default MySuper fund members, by definition, have had minimal, if any, involvement in investing their funds prior to retirement and are, therefore, particularly poorly placed to suddenly manage these risks at retirement.

To address these problems, it is important for trustees to recognise that behavioural biases afflict us all and design techniques to nudge members towards improved outcomes.

A default fund that limits itself to the accumulation phase will not be in a position to engage with members to better understand their needs and guide them during the difficult transition in pre-retirement and through the retirement years.

Trustees need to develop a retirement benefit framework for their fund that includes consideration of the needs of the membership and a range of strategies to manage the various risks members face.

O’Dwyer clearly articulated her expectation for the industry to give more attention to members’ needs in retirement. For those in the industry who do not support governments intervening in superannuation, this presents an opportunity to drive change that generates better outcomes for members.

Patricia Pascuzzo is the founder and executive director of the Committee for Sustainable Retirement Incomes (CSRI).

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